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Daily Newsletter, Tuesday, 10/10/2000

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The Option Investor Newsletter                  Tuesday 10-10-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        10-10-2000        High      Low     Volume Advance/Decline
DJIA    10524.40 - 44.00 10623.50 10488.90 1.05 bln   1140/1680
NASDAQ   3240.54 -115.02  3383.40  3229.01 1.89 bln   1319/2626
S&P 100   737.68 -  6.55   748.66   735.41   totals   2459/4306
S&P 500  1385.94 - 16.09  1408.83  1383.85           36.3%/63.7%
RUS 2000  481.63 -  7.90   490.84   481.09
DJ TRANS 2497.23 +  6.60  2526.22  2479.04
VIX        27.44 +  1.11    27.89    25.89
Put/Call Ratio       .82
******************************************************************

Welcome Back To Earnings Warning Season

October has a way of twisting things around and sending the
markets reeling and today was no exception.  Are you having any
fun yet with this year's shakeout?  Today was no exception as
stocks took it on the chin once again.  The downtrend lasting
nearly six weeks remains in tact.  If anything we have seen a
sharp increase in volatility as the VIX made its way up to 27.50.
This has helped liven up the options market relative to a dull
summer, but the bulls remain in hiding.  At least the smart
bulls anyway.

Today was just brutal as any remaining buyers were tough to
find.  It shows in the numbers too.  The Dow Industrials pierced
10,500 intraday, before managing a small rebound to close at
10,524.40, down 44.03.  Volume was average at 1.04 million.
Advancers lost to decliners 17-11 and 116 new lows were printed
versus 37 new highs.  The S&P 500 couldn't hold 1400 and settled
down at 1385.94.  The Russell 2000 also gave up ground by
losing 7.90 to finish at 481.60, below technical support.  The
chart of the Dow 30 below shows the peril the index is facing.
A close below 10,500 will not be well received by Wall Street,
making the current support at 10,500 critical.




The Nasdaq didn't have any better luck today.  The close was
at 3240.53, down 115.02.  Volume was heavy at 1.83 million.
Decliners were ahead of advancers 2-1 while new lows seriously
dwarfed new highs 282-16.  The downward pattern is clearly in
tact as sellers pressure any rally.  In fact, the selling has
now accelerated as the Nasdaq broke down below that channel we
had been watching for the past two weeks.  Hopefully this is
a good sign that a final capitulation is around the corner.
The markets are oversold and will eventually bounce, but that
is not to say it can't get more oversold first.




The story of the day though was related to earnings, both
announcements and warnings.  And all came after the close this
afternoon.  Let's start with the losers.

Lucent announced today after-hours that, based on preliminary
estimates, it expects earnings for Q4 to be lower than the
company's previously announced guidance.  LU was supposed to
post a profit of $0.27 next Thursday, but instead will only
turn in about $0.17-0.18 cents per share.  The insanity of
this warning is that it is the third time this year and second
time this quarter that Lucent has warned of a shortfall.  The
company said the lower-than-expected earnings for the quarter
could be almost equally attributed to three factors: less than
expected revenues and gross margins in the company's optical
systems business, credit concerns in the emerging service provider
market that led to increasing reserves for bad debt, and greater
than anticipated decline in circuit switching sales and margins.
So while the company continues to warn, investors continue to
sell.  LU closed the day at $31.38, but is trading around $24
in after-market action.

Also, PacifiCare Health Systems announced that it expects to
report results ranging from a loss of up to $0.10 per share to
break-even for the quarter ended Sep 30th, based on preliminary
data showing higher-than-anticipated commercial and Medicare
health care costs.  These costs reflect the impact of providers
operating under non-capitated agreements, and amounts incurred
to improve network stability and maintain member continuity of
care.  As a result, earnings per share for 2000 will not meet
the company's expectations.  PHSY traded to $32.63, down $0.88
during regular trading, but was around $20 after-hours.

And now to earnings.  Yahoo started the Internet earnings parade
like always this afternoon.  They said they earned $81.1 million
or 13 cents per diluted share on a pro forma basis in the third
quarter, compared with $38.5 million or 6 cents per share in
the year-ago period.  The pro forma earnings compared with the
consensus analyst estimate for earnings of 12 cents per share,
according to First Call and were right in line with whisper
numbers.  The company said revenue rose 90% to $295.5 million
from $155.9 million.  Analysts were expecting revenue of about
$281-$295 million.  Yahoo, which relies heavily on adverting
sales to generate revenue, said Web site traffic increased
worldwide to 780 million page views per day on average during
September, compared to an average of 680 million page views per
day during the last month of its second quarter.  Slowing ad
revenue was a concern in the past weeks.  All in all, the report
was right in the middle of expectations, but the phrase "difficult
environment" was mentioned eight times on the conference call.
Eight times!  It appears that Internet arena will continue to see
rough times ahead, at least for the next couple of quarters.  The
stock initially traded higher on the news, but has pulled back to
close after-hours around $76.  This is the kind of report that may
take a few days for investors and analysts to decide if Yahoo
deserves the lofty valuation that it still carries despite the
recent sell-off.

Biotechnology firm Biogen on Tuesday reported a 10% gain in
third-quarter income, beating Wall Street estimates by a penny.
The maker of the multiple sclerosis drug Avonex said its net
income rose to $68.4 million, or 44 cents per diluted share,
up from the year ago period when it reported $62 million in
net income or 39 cents a diluted share.  James C. Mullen,
Biogen's President and Chief Executive Officer, said, "With
its proven results and broad-based efficacy, AVONEX remains the
worldwide drug of choice among people with multiple sclerosis
(MS) and their physicians.  This quarter, we saw global product
revenue growth of 18 percent year-over-year."  BGEN was trading
higher after-hours to $53.50 from the regular close of $51.50.
News on the conference call revealed that three clinical trials
will begin on anticipated drugs in the year 2001.

And finally, Motorola released earnings as well.  MOT said that
its profit from operations before special items was $598 million,
or 26 cents per share, an increase of 66 percent from $361
million, or 16 cents per share a year ago.  Robert L. Growney,
president and chief operating officer, said, "Motorola continued
to make solid progress on improving its financial performance.
Significant contributions to the company's growth in sales and
operating profits came from the Semiconductor Products, Broadband
Communications and Global Telecom Solutions segments."  The
much anticipated cell phone margins were in line at 6%.  MOT
was trading about even with the regular session close.

While not the story of the day, Semiconductors definitely came
in a close second.  The SOX.X got hammered again and broke more
support levels.  I had to insert a chart so you could see the
degree of carnage that the SOX has suffered.  The thing about
Semiconductors (that anyone who trades them could tell you) is
they are very jumpy, like most commodity based sectors.  Just
when it looks the darkest, it will turn on a dime and trap you
into a losing trade so be careful.  The one thing you can expect
is more volatility for this bunch.  This sector loves to bounce
around in October.




So the first big day of earnings numbers has come and gone and
the markets don't look to be better off because of it.  The
QQQs are trading in the mid-77 range after-hours as Yahoo is
selling off.  The Lucent warning will do little to help sentiment.
Anytime you see Drugs, Oil, and Utilities rising, you know
that we are in some degree of trouble.  I put a strangle on
the QQQs this morning which should be pay off nicely in the
morning.  I am hoping for a nice gap down to take my profits
on the puts in the morning.  From there, it is still tough to
call a bottom in such an extreme market.  But if it gets extreme
enough, there should be opportunities to buy calls.  In fact,
I am just now watching CSCO trade $49, below the critical $50
level and well below the $51.25 close.  Maybe we will get that
final crack in the buyers and see the rapid spike down that
some bulls are waiting for before entering the market.  A more
safe play if you are looking for an entry in such a spike down
would be November contracts.  Leave the OCTs for the gun-slingers
at this point.

No nothing new to report from Switzerland where Jim is attending
a conference.  He will be back in the States this week though,
so look for his market commentary beginning again on Sunday.


Ryan Nelson
Editor


*****************************
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****************
MARKET SENTIMENT
****************

Look...Light At The End Of Our Tunnel!
By Austin Passamonte

Funny, I never realized light preceded such a rumbling thunder.
That's what we heard this morning as the Dow tried valiantly to
oust the tech sector from its doldrums. For a brief while there we
saw green painted on our chart screens and hope actually sprang
eternal for traders holding calls. Freight-train express heading
straight south... choo - choo!

Reality set in and stop orders were struck. Looking over the daily
charts for all major indexes, it's been quite some time since
we've witnessed a prolonged market slide like this with precious
little relief. Is any in sight?

By now you've read the Market Wrap and discovered who's been
naughty and nice so far, 'fessing up to earnings reports. The
markets will move tomorrow based on such news.

We are up to our necks (or other body parts) in negative sentiment
and every buying attempt is met with waves of eager selling.
Everyone but those wanting out of long positions and objective
reporters (oxymoron?) are sick & tired of the selling. Doesn't
that count for anything?

Yes. The markets are nothing more than a giant collection of
humans. Humans run on human emotion. Therefore, markets run on
human emotion. These are the very same senseless animals who
couldn't buy tech stocks fast enough less than two short months
ago. All the warnings we are now experiencing were forecast then,
but nobody cared.

COT Reports? VIX? High oil prices? Seasonal tendencies in Sep/Oct?
Jim Brown & Market Sentiment preached this until blue in the
pixels during August and few cared. Actually, a few who did care
cancelled subscriptions and said we were too bearish. We hope they
used their subscription money saved to buy distant-month puts back
then.

This market is technically ugly and worse every day. Support is
being tested and broken most every session. A bottom could lie
near or far below. Which is it?

Beats us, but here are some clues to watch for...

1. The VIX is trending higher. It is now in the 26 - 27 range
which could signal a market bottom at any time. Do the bulls
recall how long we preached that below 20 was danger? Other side
of the equation now; the VIX is to be looked on as bovine-friendly
these days.

2. Put/call ratios are soaring and overhead disparity is nil. We
are ripe for a powerful short squeeze, but don't mistake it for
an autumn rally with legs. Trade it day by day when it comes and
maybe the days will actually string together.

3. Oscillator signals on charts are failing to signal the downside
very well at all. They have no chance to cycle into short-term
overbought on intraday charts before the massacre continues. This
customarily happens towards the tail end of extreme moves just
before reversal occurs.

4. Stocks are cheap. We don't care how gloomy near-term earnings
are, humans are emotional animals, remember? Winter is coming and
they need to store away supplies in advance. INTC in the $30s and
CSCO near $50 among a cast of hundreds are too tempting for many
to pass up very long. The first wave of nibbling could easily
ignite buying fever like blue-haired ladies at a Friday-morning
yard sale.

5. The Commercials. These are exactly the conditions when market
giants begin to quietly amass long positions in the market. They
are the ultimate contrarians and survive by shearing small trader
"sheep" over and over again. We will watch each Friday's COT report,
looking for signs of the S&P 500 commercials covering their
decade-high short position. We will also back up the truck for
calls & LEAPs when they reach flat or net-long positions.

When all technical hope is gone, when our crystal ball turns black
as a Brunswick we rely on that last bastion of market truth; the
overwhelming sentiment is always 100% wrong at the turn. We can't
be sure where the turn is but the sentiment part is upon us. The
rest may not lie far away as well.

*****

VIX
Tuesday 10/10 close; 27.44

30-yr Bonds
Tuesday 10/10 close; 5.83%

Support/Resistance Indicator
The Index Support/Resistance(S/R)Ratio is a formula used to
gauge possible support or resistance based on open-interest
disparity. Ratio listed is percentage of calls to puts or
puts to calls respectively.

Support is factored from dividing puts by calls at strike
levels beneath index closing price. Resistance is factored
from dividing calls by puts at strike levels above current
closing price.

                                   Tuesday
                                 (10/10/2000)
  (Open Interest)        Calls         Puts          Ratio
S&P 100 Index (OEX)
Resistance:
775 - 760               12,257       11,202           1.09
755 - 740                4,225       19,847            .21

OEX close: 737.68

Support:
735 - 720                   68       16,111         236.93***
720 - 700                   77       11,477         149.05***

Maximum calls: 770/4,541
Maximum puts : 750/9,927

Moving Averages
 10 DMA  757
 20 DMA  769
 50 DMA  795
200 DMA  782


NASDAQ 100 Index (NDX/QQQ)
Resistance:
 87 - 85                15,511       25,448            .61
 84 - 82                 9,390       20,223            .46
 81 - 79                 3,029       23,293            .13***

QQQ(NDX)close: 78.125
Support:
 77 - 75                   381       12,412          32.58
 74 - 72                    74        4,745          64.41***
 71 - 69                   122        2,839          23.27

Maximum calls: 78/20,2590
Maximum puts : 80/14,565
Moving Averages
 10 DMA 85
 20 DMA 88
 50 DMA 92
200 DMA 94


S&P 500 (SPX)
Resistance:
1450                    12,719       11,387           1.12
1425                     8,782       14,850            .59
1400                     2,422       11,322            .21

SPX close: 1385.94

Support:
1375                     1,004       14,413          14.36
1350                       523       22,943          43.87***
1325                       378        7,567          20.02


Maximum calls: 1475/21,156
Maximum puts : 1350/22,943

Moving Averages
 10 DMA 1429
 20 DMA 1444
 50 DMA 1470
200 DMA 1447

*****

CBOT Commitment Of Traders Report: Friday 10/06
Biweekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade. Small specs are the general trading
public with commercials being financial institutions.
Commercials are historically on the correct side of future
trend changes while small specs are not. Extreme divergence
between each signals a possible market turn in favor of the
commercial trader’s direction.


                    Small Specs            Commercials
DJIA futures
Open Interest
Net Value               848                   -753
Total Open
Interest %        (12.82% net-long)      (5.15% net-short)

NASDAQ 100
Open Interest
Net Value              -204                   -708
Total Open
Interest %        (1.22% net-short)      (2.10% net-short)

S&P 500
Open Interest
Net Value              50277                 -57890
Total Open
Interest %        (29.17% net-long)      (9.76% net-short)

What COT Data Tells Us: Commercial positions in S&P 500 and
DJIA remain at or above five-year extreme short levels.

Small specs continue to build net-long extremes in SP00S but
have given ground in DJIA and switched over to net-
short in NDX.

(Not Shown) Commercial positions in 10-Year Note and 30-Year
Bond markets at or near five-year extreme net-short levels.
Small specs build net-long.

Summary: "Smart money" insiders expect stock market to decline
and interest rates to rise. Small traders directly opposite,
creating diverse set up favoring commercial sentiment for
future market direction. *Data compiled on 10/03 by COT

(Canadian Dollar commercial traders entering five-year extreme
net-long positions.  Expect this currency to rally, possibly
mild affect on U.S./Canadian based-companies in trade exchange).

Bullish:
Fed's finished
Benign government reports
Disparity in overhead call/put ratios

Bearish:
Oil Prices (falling)
COT reports
Recent pre-warnings, downgrades (brutal)
Broad market's break of critical M/A support
Market leaders breakdown


**************
MARKET POSTURE
**************

As of Market Close - Tuesday, 10/10/2000

                                  Key Benchmarks
Broad Market           Last     Support/Resistance   Alert
****************************************************************

DOW   Industrials      10,524      10,450  10,900     **
SPX   S&P 500           1,385       1,360   1,445     **
COMPX NASD Composite    3,240       3,150   3,650     **
OEX   S&P 100             737         735     770
RUT   Russell 2000        481         470     510     **
NDX   NASD 100          3,188       3,150   3,500     **
MSH   High Tech           870         860     950     **

BTK   Biotech             675         650     740
XCI   Hardware          1,173       1,155   1,310     **
GSO.X Software            395         385     445
SOX   Semiconductor       706         650     870     **
NWX   Networking        1,120       1,090   1,210     **
INX   Internet            406         385     465

BIX   Banking             573         560     610     **
XBD   Brokerage           584         555     640     **
IUX   Insurance           752         735     790

RLX   Retail              789         765     835
DRG   Drug                413         370     425
HCX   Healthcare          851         825     860
XAL   Airline             141         138     152
OIX   Oil & Gas           320         296     332

Eleven alerts were triggered over the past two sessions, all at
support levels.  Lowering support (DOW, SPX, COMPX, RUT, NDX, MSH,
XCI, SOX, NWX, BIX, XBD) Lowering resistance (COMPX, RUT, NDX, MSH,
BTK, XCI, SOX, INX, BIX, and XBD) The DRG, HCX, and OIX have been
benefiting from a defensive market and are three sectors that had
triggered alerts at resistance within the past month and haven’t
violated support levels.


**************
TRADERS CORNER
**************

Another High-Potential Sector to Watch: Power Chips
By Scott Martindale

Are we there yet? Was that the "thud" of a market bottom?  All the
bulls seem to think we’re close.  I’m certainly ready for that
Fall rally.  I never seem to make the same money playing the
downside like I do on the upside.

On Sunday, Jim wrote about John Dessauer’s picks and gave
recommendations on playing long-term options on them.  I’ve always
liked what John has to say, and I subscribed to his service for a
long time, but I’ve generally selected the wrong recommendations,
like RAD, CBR, and CD.  I really got burned when I backed up the
truck on Rite-Aid by selling naked puts and taking the stock.  I
got out of most of my positions on the way down.  Nevertheless, I
intend to buy more if and when it starts to come back.  I still
hold some Rite-Aid 2002 bonds that I bought for their 40%
effective annual yield if held to maturity (and RAD stays
solvent).  [It is now looking like it has finally bottomed.]
Despite the past unfortunate selections, I intend to enter some of
Jim’s combination plays on Dessauer’s stock picks this month.

Over the past few weeks I’ve written about a couple of hot,
volatile sectors that might be fun and profitable to play, i.e.,
fuel cells and superconductors.  Today I’ll talk about another
new-technology sector: Power Chips.

First, what is a Power Chip?  They are the semiconductors designed
to regulate electricity in an appliance to give the item a cleaner
source of power.  In the computing arena, unstable power can cause
problems that can throw off calculations which in turn causes
crashes and, in the most severe cases, can damage sensitive and
expensive electronic components.  Power semis help electric sources
meet these needs for pure energy in information technology
equipment to ensure that this high-end technology works reliably.

Within the circuits of a high-tech appliance you find gatekeepers
at the circuit level like diodes and thyristors as the energy is
converted from AC to DC and then guided throughout the appliance
as orderly as possible where other types of power chips control
the flow of electrons.  Depending on the efficiency of the
switches, electrical surges and spikes may enter the appliance,
but the item may be able to withstand them without incident.  Now
many of these new "appliances" are always-on, system-critical, and
highly-sensitive, like servers and routers.  They need a more
pure, reliable and stable form of energy (say, 99.999% reliable)
to meet their needs.

Power semiconductors are finding their way into many common items
in the automotive, computer, lighting and telecom industries.
They are used to regulate power conversion, toggle electrical
loads on and off, regulate electrical flow, or distribute
electrical loads.  They provide orders of magnitude improvement in
the speed of the electrical switches to give today’s faster
circuits the access to pure power.  The power chip market is
expected to grow to $12 billion by 2002.

Players in the power chip space include National Semiconductor
(NSM), Vishay (VSH), Semtech (SMTC), Mitsubishi, Advanced Power
Technology (APTI), International Rectifier (IRF), and IXYS
Corporation (SYXI).  NSM, VSH, SMTC, and Mitsubishi are large,
established firms that offer a broad range of electronic
components for applications in information appliances, consumer
electronics, personal systems, wireless communications, flat-panel
and CRT display, power management, local and wide area networks,
automotive, consumer and military aerospace markets.

However, the previously tightly-integrated semiconductor industry
has broken out into many new specialized companies with very
refined core competencies.  APTI, IRF, and SYXI are focused on
power semis, and they are also smaller and more speculative.  APTI
is the new kid on the block making high-performance semis that
condition and regulate electricity in computers, cellular base
stations and other electronic devices.  SYXI makes power semis and
power modules to convert and control power in items like motor
drives, uninterruptible power supplies and medical devices.  IRF,
the leading power chip company, makes semis that refine
electricity coming from wall sockets or batteries to help
electronics run more efficiently and can be found in appliances,
autos, computers, lighting and communication products.  Of the
three, only IRF is currently optionable.  IRF and SYXI have
similar price patterns; however, if you look at the charts, SYXI
is much more explosive, and you can play the stock at a reasonable
cost since it currently trades around $25.




As the biggest player, IRF gets most of the business and makes
most of the press releases.  In July, they announced a 900%
increase from the prior year in fourth quarter profits.  Over the
past few weeks, they have put out a spate of press releases on new
products and partnerships.  Nonetheless, the price pattern
generally tracks the Nasdaq rather than the news.

When good announcements and favorable market conditions provide
the impetus for a little momentum run, consider buying more than
one call so that you can take some profits along the way without
having to completely exit the play.  As the stock runs on the
news, you’ll want to lock in some gains or move up your sell
stops.  Of course, another way to benefit is to buy the stock on
weakness (including the non-optionable ones) and just wait for the
next move to happen.

Power chip stocks are not so speculative as the alternative fuel
and superconductor stocks I’ve written about recently (IRF has a
P/E of only 35).  And they are not quite so news driven, so you
shouldn’t see the rapid gap-up/gap-down behavior.  The technology
is on the market and affordable.  With growing demand for the many
products that require highly sensitive and reliable power
management, power chip stocks have some big upside potential
within a strong tech market.


******

We Asked For Volatility and Now It's Here
By Mary Redmond

It seems that every reaction in today’s market is an exaggerated
reaction.  If an analyst upgrades a stock, it can jump 20 points
in one day.  If a company warns that its earnings might be a few
cents below expectations, then its market value can get sliced in
half in one day.  In addition, upgrades and downgrades impact
other stocks in the sector.  We saw an example of this today in
the chip sector.

The market overreacts to statements made by the Federal Reserve
in a particularly volatile manner.  During the first few rate
hikes of 1999, the investment community put such an emphasis on
the bias of the Fed that the markets would frequently move as
much as 100 or 200 points just because of the bias.  This is
probably why the Fed eliminated the bias.

The Federal Reserve generally does not like excessive market
volatility.  It's just one more thing for them to worry about.
So, during the last Fed meeting the members of the Fed may have
been thinking to themselves, "if we leave rates alone and state
that we feel it is important to keep a vigilant watch on
inflationary tendencies, then the markets probably won't move
much.  If we leave rates alone and give an indication that our
bias may have been changed to neutral, the markets may explode to
the upside.  Let's pick the stance which will be most likely to
cause less volatility."

The interpretation of this stance was that the Fed thought that
they might not have fully eliminated inflation, and in the worst
case, could raise rates again.  The markets proceeded to fall
apart last week.  If the Fed had given an indication they were
neutral, would the markets have rallied?  We'll never know, but
perhaps the most important thing to remember is that the
statements made by the Fed are probably designed to cause as
little market volatility as possible.

It is interesting to examine a stock's chart in comparison to
the implied volatility of the stock's options, as this can be
indicative of how implied volatility moves as the price changes.
Think of options trading like skiing - the steeper the slope, the
more dangerous the option.  This can mean if a stock has a chart
which has recently made a sharp, steep move up or down the implied
volatility of the options is likely to be high.  It is generally
best to try to buy options which have low implied volatility
compared to the stock’s historic volatility.

The ideal time to buy an option is when it has been almost flat,
and you expect a huge move.  Situations like this can be hard to
find in today's market.  Many people have bought options on fast
moving technology stocks and watched the options decline
dramatically while the stock declined only a few points.  This
can be partly because the implied volatility of the options was so
high that the probability of the option rising was very low.

If you are bullish on a stock which has options with high
implied volatility, it can often be profitable to sell puts or
use a put credit spread.  Naked puts are highly risky in
today’s market, but sometimes put credit spreads can be
highly profitable, as a put will often decline more rapidly
than a call will increase if a stock rises.

Monday was the type of day that day traders dream about.  The
Nasdaq had a complete collapse accompanied by a spike in the
VIX.X to 27, which is higher than it had been in months.  Then,
a number of key tech stocks, including JNPR, which is due to
release earnings this week, showed a rising stochastic chart
pattern which indicated a very high probability of the stock
moving higher.  Brave traders who dared to buy at $180 could
have sold the stock for over $208 later in the day.  A more
conservative trade would have been to buy at $185 and sell at
$199.




In fact, there have been excellent day trading opportunities
both Monday and Tuesday for nimble day traders who could get
in and out of positions within minutes.  These opportunities
will probably continue over the next few weeks.  However, we
may need to wait a little longer until traders and investors feel
comfortable buying and holding technology stocks, since they
have been burned so badly this year.




Many market analysts have been noticing that the Nasdaq leaders
like Microsoft, Cisco, and Intel have lost a large percentage
of their market capitalization in the last several months. At
the same time, many of the mid-cap networking and technology
stocks have presented tremendous trading opportunities, as
they are starting to attract almost as much money as last year’s
market leaders.  This could be partly attributed to traders’
boredom and frustration with the very large capitalization
tech stocks.


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***********
OPTIONS 101
***********

The School of Hard Knocks
By David Popper

There I was, fully invested in the best stocks in the universe
including DELL, MSFT, CSCO, TXN, etc.  I thought that I was on the
verge of making a lot of money because for the first time
I was fully margined.  True, I could have made more money if I
had purchased these stocks at a sound entry point.  Unfortunately
when an entry point was available, the stock had dipped and I was
too new to understand the gift being presented.  After the issue
bounced off of support and raced ahead 20% I purchased the stock
because it was a rocket that had "proved" itself to me.  Somehow
I felt safer buying these winners.  The day was August 31st, 1998
and over the course of the next two days, I was going to learn
some very expensive and valuable lessons.

As you may recall, August 31st and September 1st of 1998 were
classic climax selling days which caused the Nasdaq to drop more
than 500 points before reversing sharply in the afternoon of
September 1st.  This formed the bottom which began a powerful 30
day rally.  During these days I felt panic as the market dropped,
relief when I sold, and utter disillusionment when the market
reversed after I sold.  I realized that had I stayed in the market,
my losses would have been erased.  I realized that if I had
purchased the stock correctly, I would have made money.  I
finally realized that if I had been a panic buyer instead of a
panic seller, I could have made a year's worth of profits in only
one day.  Yes, there was more to this game than just picking stock.
I realized that there were rules to this game and if I was going to
be successful, I had better learn these rules.  I realized that
this was not a one time event, and I had better play this
situation better the next time.  Below I will discuss some of the
lessons that I have learned.

1. ONLY TRADE THE TOP STOCKS
Institutions have certain favorites.  These favorites are often
bought on dips.  Flashy stocks without earnings simply do not
survive the hard times.  You can rest assured that institutions
will buy the generals like SUNW, CSCO, and ORCL on dips.  I would
not bet the farm on KOOP, KTEL, KREM, or MSTR however.

2. ONLY TRADE STOCKS THAT ARE ON THE CUTTING EDGE
Technology is changing fast.  What was cutting edge 2 years ago
is simply a commodity, or worse, obsolete now.  Remember those
traders that used to exclaim in the chat rooms that they would
keep AOL and Dell forever?  Well, at the time it seemed that the
party would never end, but it did end.  Computers and the net
are not the rage, broadband replaced it.  Will broadband last?
Only until the next technological breakthrough occurs.

3.  MONITER THE QUALITY OF YOUR STOCK ON A MONTHLY BASIS
Love may last forever, but even stocks in cutting edge areas may
falter.  Consider LU for a moment.  LU was a market darling in
the early 1990's.  The LU management wisely noticed that the
fiber optic market was white hot and LU entered the arena.  For
whatever reason, LU has not fared well. Virtually every stock in
this sector is doing well except LU.  LU is now at a 52 week low.
It is important to monitor your stocks on at least a monthly
basis in order to avoid being stuck with a has-been.  Inasmuch as
my strategy of choice is covered call writing, I am compelled to
evaluate my holdings on a monthly basis.

4.  ONCE YOU HAVE SELECTED QUALITY STOCKS, DO NOT SELL INTO A
GENERAL MARKET PANIC
When markets panic, as they occasionally will do, do not panic.
Institutions will view this as a buying opportunity and will
purchase quality stock at a discount.  When the market rallies,
often quality stocks rapidly reach new highs, while lesser stocks
continue to wallow.  DELL reached an intra day low of $40 on
September 1st, 1998 and was double that price within 30 days.
Just the same, INTC had some bad news which may have some
relevance to box makers and DRAM chip producers, but it does not
have any meaning to other areas of technology.  On such a
downturn, other good issues from other dynamic sectors may
experience an initial plunge, only to roar back.  It would be
better to be a buyer on such dips, not a seller.  Peter Lynch once
said that more money is lost in preparing for corrections than
would have been lost in the correction itself.  Again, owning
quality stocks is the best defense to corrections.

Next week I will discuss other lessons learned the hard way in
1998.


*************
DAILY RESULTS
*************

Index       Last    Mon     Tue    Week
Dow     10524.40 -28.11  -44.03  -72.14
Nasdaq   3240.54  -5.45 -115.02 -120.47
$OEX      737.68  -6.74   -6.55  -13.29
$SPX     1385.94  -6.96  -16.09  -23.05
$RUT      481.63  -1.49   -7.90   -9.39
$TRAN    2497.23 -53.02    6.60  -46.42
$VIX       27.44   0.66    1.11    1.77

Calls

CIEN      114.66  -0.25    4.34    4.09  Late-day recovery
QCOM       79.69   1.56    0.31    1.88  Strength in bear market
LLY        84.50  -0.25    1.81    1.56  Safety in pharmas
SEBL       93.81   7.75   -6.38    1.38  Relatively higher lows
MRK        76.88  -0.75    1.56    0.81  New, close to breakout
NT         60.00   0.94   -3.25   -2.31  Watch out for LU warning
CHKP      154.25   2.94   -6.50   -3.56  Consolidating on less vol
ADBE      143.69   2.06   -6.00   -3.94  Dropped, fell apart
SUNW      103.19  -0.69   -3.63   -4.31  New, earnings run!!!
MERQ      124.50   2.16  -20.66  -18.50  Dropped, bulls in hiding

Puts

CRA        66.25  -8.06   -5.06  -13.13  Breakdown on big volume
JBL        42.06  -4.38   -4.81   -9.19  Thank you Dan Niles!
AETH       75.81  -2.56   -3.88   -6.44  Increasing weakness
JPM       146.75  -1.13   -5.13   -6.25  New, fears adding up
QLGC       70.75   3.13   -6.63   -3.50  No news is bad news
CPTH       49.69   2.63   -3.69   -1.06  Reprieve or entry point?
INKT       90.63   5.50   -5.88   -0.38  Biding time above $90
DIGX       38.19   1.19    0.06    1.25  Dropped, found bottom
AKAM       41.75   7.75   -2.19    5.56  Institutional selling


PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

MERQ $124.25 -20.66 (-18.50) Monday provided aggressive traders
with a quick and profitable trade as a morning dip found buyers
stepping in at $132, just above strong support at $130.  Bouncing
strongly, the stock spent the remainder of the day heading higher
to close at $145.17, up $2.17.  While volume was light, traders
who bought into the dip were amply rewarded.  Today however, the
buyers were nowhere to be found as MERQ neared $130.  A
half-hearted bounce was quickly denied as the stock violated its
key support level.  Selling volume accelerated into the close and
by the day's end, MERQ finished down over 14% on heavy volume.
The stock may find support near its 50-dma, currently at $121.14
but former support at $130 now becomes formidable resistance.  As
a result we are closing the play.

ADBE $143.69 -6.00 (-3.94) After a decent Monday trading session,
ADBE fell apart with the broader tech index today.  Along the way,
the stock violated the $145 area that it desperately held onto
in Monday's trading.  The entire NASDAQ is being swept up in the
selling as investors wait for the "capitulation" to come.  But
until that moment comes, tech stocks continue to bleed, including
ADBE.  Although ADBE managed to bounce from $140, we are dropping
it tonight because of its pattern of lower highs and the overall
negative market sentiment that even the most resilient cannot seem
to buck.


PUTS:
*****

DIGX $38.19 +0.06 (+1.25) It's been lucrative to play DIGX as it
steadily slid towards all-time lows on takeover and merger news.
However, the stock is currently finding a bottom at the $36 to
$38 price levels.  The bargain hunters were apparently lured
by the attractive share price.  Recall, DIGX has lost over 56%
of its value during its recent descent.  Digex is also scheduled
to release 3Q earnings on October 26th during a conference call
from 9am to 10am EST and this could also be generating some
interest.  Since it's best to exit with profit, we dropping DIGX
from our put list this evening.


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The Option Investor Newsletter                  Tuesday 10-10-2000
Copyright 2000, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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********************
PLAY UPDATES - CALLS
********************

QCOM $79.69 +0.31 (+1.88) The strength that lifted QCOM from
the $60 level in September continues to thrive in this bearish
environment.  The recent resurgence brought the stock through the
crucial $80 level and there appears to be more upside to come.
With CDMA back in the picture in China and good news on the
Korean front, the prospects for QCOM look good.  Pet Peterson at
Prudential Securities recently commented that QCOM was close to
signing a deal with China for the company's CDMA technology.
Several other events on the Asian front could act as positive
catalysts for our play.  This includes news that China Unicom
(CHU), a telecommunications  company with over 14 million
subscribers, may use QCOM's CDMA technology for a wireless market.
And in Korea, good news came from Ahn Byung Yub, when the Minister
of Information and Communication made it clear in a press briefing
that QCOM's would face less competition.  With billions of dollars
at stake, it's likely the stock will return to the limelight.
It's becoming more evident that institutional investors likely
share this sentiment, which is dictated by the recent volume
levels.  Depending on your risk portfolio, this week's trading
offered a variety of entries into this momentum play.  The
pullback yesterday provided lower entries at near-term support
around $76-$77 and the 10-dma line.  Today's strong break over
$80, on the other hand, provided a more conservative entry.  In
the coming sessions, look for the $80 level to evolve as support
and confirm the recent strength

CIEN $114.66 +4.34 (+4.09) The share price is currently
struggling to break to the upside of $120 and maintain the
upward momentum that took it to a new 52-week high of $136.25 on
September 25th.  In today's session though, CIEN made a good run
as its sector mostly advanced.  The volume increased on the
upswing and overall, trading activity was at almost twice the
ADV.  This is definitely a bullish indication that CIEN can meet
the challenge at near-term resistance at $120.  CIEN is presently
sandwiched between the 5-dma at $113.47 and the 10-dma at $117.47.
It's very risky to jump in on dips at the 30-dma at $111.39.
Consider taking a more cautious approach and enter into new
positions only after CIEN breaks to the upside of its primary
trading channel between $110 and $120.  CIEN may be on of the
"hot"  opticals, but nothing's a guarantee in this shaky market.
Keep stops tight.

CHKP $154.25 -6.50 (-3.56) CHKP participated in the massive Tech
rebound yesterday, which carried the stock back above the $160
resistance level.  However, CHKP's rally began to fizzle as the
stock approached the $165 level.  The wavering action in the
NASDAQ towards the end of trading yesterday was the highest
hurdle preventing CHKP from advancing above $165.  The NASDAQ
was to blame for CHKP's retreat today too!  CHKP slipped back
below the $160 level, and finished under the 10-dma at $156.50.
Volume has steadily declined over the past four trading sessions
as CHKP has churned around its 10-dma.  The sideways trading in
CHKP could lead to another explosive intraday rally once the
NASDAQ decides to stabilize.  Aggressive traders might continue
using quick rallies above the 10-dma, now at $156.50, or pops
above the $160 level to take quick profits from CHKP.  The more
conservative traders need to practice patience and wait for the
NASDAQ to grow rally legs and target shoot for entry when CHKP
advances strongly above the $165 level.

SEBL $93.81 -6.38 (+1.38) SEBL bucked the NASDAQ bears yesterday
with great gusto.  As highlighted in the Play of The Day, SEBL
rose substantially higher on volume that indiicated the move
had staying power.  However, much to our shagrin, the NASDAQ
bears got their paws around SEBL today and clawed the stock
back down.  However, although SEBL pulled back today, it was
encouraging to see the stock trace a relatively higher low at
$93.  Before the bulls claim victory, though, SEBL needs to rally
significantly above the critical $100 level on convincing volume.
The $100 area has been allusive for over a weak now, and could
mark a significant turning point should SEBL hurdle the level.
While the conservative traders might wait for SEBL to cross the
$100 level, aggressive traders might consider taking entries on
bounces off the $93 support level or target shooting on quick
rallies back above the $95 level.  No matter the entry strategy,
watch the direction of the broader Tech sector by monitoring the
NASDAQ.  Use SEBL's competitors ORCL, MSFT, and ITWO to gauge
direction in the Software sector.

LLY $84.50 +1.81 (+1.56) Traders and investors alike are running
to the drug stocks for shelter, and for good reason.  This is one
of the few sectors which analysts are maintaining a positive
outlook for earnings.  Analysts are bullish on the sector, with
Parker Hunter analyst Richard Lawrence recently noting that
pharmaceuticals have a good probability of achieving high growth
objectives.  Merrill Lynch also came out with positive comments,
saying that it expects drug companies to report earnings above
Wall Street estimates.  Add to that a stellar earnings report
from Abbott Labs today as well as comments from Chase H&Q analyst
Alex Zisson on drug stocks as a "safe place to be" and it's no
wonder why drug stocks continue bucking the downtrend.  At this
point, conservative traders will be watching for LLY to break
above $85 on strong volume for an entry.  Aggressive traders
looking to enter on a pullback could target shoot a bounce off
the 5- or 10-dma (at $83.47 and $82.45).

NT $63.56 +0.19 (+1.25) During NY trading, NT actually pounded out
a gain in the face of another NASDAQ sell-off.  But, thanks to
another earnings warning from LU, NT felt the heat in after-hours
trading and finished the day at $60.  Almost every tech issue was
down in after-hours as the negative sentiment continues to grow.
The  market environment has become increasingly difficult, and NT
Has come under pressure.  We are looking for a bounce from $60,
yet in extreme market conditions, panic sellers do not
discriminate.  Therefore, we suggest using caution in entering
new plays.  If the bulls do show up tomorrow to defend NT,
aggressive traders could take a bounce of the $60 level.  However,
make sure NT rebounds from support at that level before adding new
call positions and confirm positive direction in the NASDAQ.  A
more conservative entry might be gained if the bulls carry NT
back above its 10-dma near $63.


*******************
PLAY UPDATES - PUTS
*******************

AETH $75.81 -3.88 (-6.44) An early slide below $80 and a failed
attempt to break above $88 in Monday's session demonstrated the
stock's increasing weakness.  If you missed jumping on board on
the strong bounce towards previous support at $90, then there
were plenty of opportunities to buy into the downtrend as AETH
continually bumped its head on the 5-dma ($83.55) line.  The
dramatic sell-off on accelerating volume at the end of today's
session is hopefully a precursor to succeeding losses.  There is
some historical support at the current level, if you date back
to the first months of the stock going public in the fall/winter
of  1999.  However with the 52-week low at $41.13, there is
plenty of room to freefall.  Besides the recent release of 24
mln shares into the market following the lock-out period, this
is purely a snowballing momentum trend.

QLGC $70.75 -6.63 (-3.50) No news is not necessarily good news
for QLGC.  The stock is literally taking a beating in this
bearish marketplace.  When the NASDAQ tanked at the beginning of
September, QLGC fell from the grace of its investors.  The stock
is currently down $48.50, or 41%!  With the volume of earnings
warnings and downgrades within its sector, there's certainly
potential for QLGC to move deeper.  And from today's negative
performance, it appears it could do just that.  The 100-dma, now
at $78.71, is still serving as the upper resistance on attempted
breakouts.  This technical line provides the measurement for
solid entries.  But where's the bottom?  Well, while today's close
smack on the daily low is definitely a sign of weakness, a move
through this mark would provide confirmation that the downward
momentum can take QLGC lower.  The next level of support is found
at $60.  The company is confirmed to report earnings on October
18th, after market close.

AKAM $41.75 -2.19 (+5.56) Akamai said yesterday morning that it
had teamed with Novell (NOVL) to provide Web content delivery
services.  The news of the alliance spurred Thomas Weisel to
upgrade AKAM from a Buy rating to a Strong Buy.  The momentum
induced by the Thomas Weisel upgrade caused AKAM to gap above
the $45 level this morning.  Interestingly, Merrill Lynch
downgraded AKAM later this morning, which sent the stock into
freefall.  AKAM lost nearly $8 on 1.5 mln shares, all in just
thirty minutes of trading.  Additional institutional selling
could be the catalyst we need to take our put play further into
profit territory.  The $40 level has provided solid support for
AKAM over the past two days, and will be the pivotal point to
gain new entries into the play.  Watch for a failure at $40, and
make sure to confirm any decline with heavy volume as a sign
the institutions are selling.  The aggressive traders might look
to a rollover near $42.50 or higher around the $45 level to gain
new entry into the play.

CPTH $49.69 +3.69 (-1.06) Investors in CPTH got a temporary
reprieve yesterday as the stock managed to move higher to start
the week.  The first half of the day was spent trading sideways
in a tight range but by mid-day, it broke out of that range and
headed higher.  While CPTH closed modestly higher, volume was
light, clocking in at only 60% of the ADV.  What's more, the
stock closed below 5-dma resistance, now at $53.46.  Today, CPTH
attempted to build on Monday's gains in the early going but
resistance at the 10-dma, now at $55.62, combined with weakness
in the NASDAQ, was too strong.  This brought in the sellers near
the end of the day, and by the close, CPTH lost almost 7%.  Volume
was once again light, at 60% of ADV but the end of day selling
came with more conviction.  Now below $50 support, a bounce off
that level, or the 5- and 10-dma could provide for an entry point.
Conservative traders could watch for a break below $48 support with
volume.

CRA $66.25 -5.06 (-13.13) The technical picture for CRA is
looking bleak, which is good news for our put play.  Ever since
the start of the month, the stock has been heading ever lower on
accelerating volume.  Already below its major moving averages,
the past couple of days in trading have been a continuation of
that trend.  On Monday, CRA dropped $8.06 or over 10% on almost
1.3 million shares.  Today the selling continued, with CRA
shedding another 7.1%, this time on almost 1.6 million shares.
The 5-dma (now at $77.61) continues to act as resistance.  With
the break below $70 support, a trip to $50 is quite possible but
there will be support for CRA in increments of $5 starting at $65.
Look for a failure to rally above $70 or the 5-dma for an
aggressive entry point.  If CRA continues to head lower, look for
an entry on a break below $65 but confirm with volume.  With the
Merrill Lynch Biotech HOLDR (BBH) now below its 200-dma, momentum
in biotech issues is clearly negative.

JBL $42.06 -4.81 (-9.19) The 5-dma continues to act as formidable
resistance for JBL.  On Monday, the stock opened near the 5-dma
and proceeded to sell off.  Bouncing near the $45-46 area, the
stock attempted recovery but encountered resistance at the $50
mark.  Today, in sympathy with the Semiconductors, JBL gapped
down at the open below $45-46 support and spent the remainder of
the day heading deeper into the red, closing down over 10% on
over twice the ADV.  Today's close puts JBL below its last line
of moving average support, the 200-dma at $44.50.  There is much
overhead resistance for JBL including the $45-46 area, and the
5-dma near $48.50.  A failed rally above resistance would be an
aggressive entry point but only if the sellers come out in force.
Support for JBL can be found in increments of $5, at $40 and
then $35.  Look for a break below $40 on volume as a conservative
entry point.

INKT $90.63 -5.88 (-0.37) Our Sunday play description suggested two
entry scenarios for INKT.  It was a toss of the coin, as both entry
points have now been in play.  INKT did break below the $90 support
level Monday, however, investors had to be nimble and trail profits
with stops, as many saw the $84.38 low as an entry point and INKT
traded up the remainder of the day.  Our second opportunity to short
INKT occurred today, but it was off the resistance level at the
10-dma.  INKT rolled over at $102.38, which occurred early this
morning and proved to be the day high.  Investors should note that
$90 is proving to be support now, so use stops accordingly.  The
overall trend and momentum with INKT remains negative, and with the
NASDAQ dropping daily, traders can use the negative market to their
advantage.  No news is good news in our short stance on this stock
as INKT's weak fundamentals and the market will move the play.
Since INKT now sits at support once again, investors can look for
breaks below $90 as playable as well as rollovers near resistance
above at $95 and higher near around $100.


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**************
NEW CALL PLAYS
**************

SUNW - Sun Microsystems $103.19 -3.63 (-4.31 this week)

Sun Microsystems is a self contained giant.  They not only provide
the world with UNIX based servers and work stations, but they also
provide their own peripherals.  Among these are (Solaris) operating
systems, (SPARC) chip components, and the now famous Java
technology that much of today's software incorporates.  This
allows for any system to have uniform and compatible running
capability.  SUNW is poised to continue its aggressive growth as
it focuses on the telecommunications industry now.

Last Thursday, Thomas Weisel supported their Buy rating on SUNW,
stating that the company is ready to rock.  This opinion is due to
the strong business plan and systems and storage components that
help fuel SUNW in their fourth quarter.  The analysts look for
SUNW to reach a target now of $132 based on projections.  They
also indicate that this positive combination of position and
components is good to hedge a rough market.  SUNW's chart is
confirming this opinion.  Since the news was released, SUNW has
held good support at $103.  The stock's 100-dma support level
hasn't been tested since mid July, and now that it's come back
into play, it is again supporting the stock nicely.  Since the
NASDAQ turned for the worse, the 100-dma level has buoyed SUNW and
provided for wide intraday rallies.  Since we are very close to
testing a 3200 low in the NASDAQ, many investors expect a rally
attempt off this mark.  As this occurs, SUNW is poised nicely to
participate in a rebound at least to its resistance mark at $115.
Earnings will also come into play on this stock.  We are now only
eight trading days away from the confirmed announcement on Oct
19th.  This is a good time to enter for earnings run participation.
With positive market support, investors should look for SUNW to
bounce off the $103 area.  Wait for the market to confirm direction
before entering new plays by monitoring the action in the NASDAQ.

SUNW appears to be the superman of this holiday season.  Today,
they introduced the Crypto AcceleratorI.  A board that will
supercharge the speed and accessibility of e-Commerce sites for
the unprecedented online shopping that is expected.  In the above
briefing, we mentioned that these systems help boost fourth
quarter sales for SUNW.  This is an example.  Six new companies
also qualified today with SUNW to become part of the systems
iForce side.  This force provides ebusiness solutions to
costumers, another high demand area this time of year.

***October contracts expire next week***

BUY CALL OCT-100*SUX-JJ OI= 7071 at $8.00 SL=5.75
BUY CALL OCT-105 SUX-JA OI=14576 at $5.25 SL=3.25
BUY CALL NOV-105 SUX-KA OI= 2064 at $9.13 SL=6.25
BUY CALL NOV-110 SUX-KB OI= 1142 at $7.13 SL=5.00
BUY CALL NOV-115 SUX-KC OI= 3734 at $5.25 SL=3.00

SELL PUT OCT-100 SUX-VJ OI=10560 at $4.63 SL=2.75
(See risks of selling puts in play legend)

Picked on July 25th at   $103.19     P/E = 107
Change since picked         0.00     52-week high=$129.31
Analysts Ratings      11-9-1-0-0     52-week low =$ 43.78
Last earnings 07/00    est= 0.33     actual= 0.39
Next earnings 10-19    est= 0.25     versus= 0.17
Average Daily Volume = 14.94 mln



MRK - Merck & Co $76.88 +1.56 (+0.81 this week)

Merck is a global pharmaceutical company, which specializes in
the development of human and animal health products.  They are
the #1 industry leader in the US and #2 worldwide.  Some of its
more prominent drugs include Zocor and Meycaor (cholesterol
drugs), Pepcid (an anti-ulcerant), top-selling hypertension
drugs, Vasotec and Prinivil, and more recently the AIDS
medication, Crixivan.  The drug maker also provides
pharmaceutical benefit services through Merck-Medco Managed Care
which it sells to corporations, labor unions, and insurance
companies.

Investors are running scared from the techs and taking shelter
in the valued drug stocks.  According to  an analyst at
investment and research firm Parker Hunter, "people are moving
to pharmaceuticals because of their consistency and high
probability of achieving their growth objectives".  As a leading
manufacturer with a solid business model and strong sales
record, MRK has attracted many buyers.  The active trading has
sent the stock through tough resistance at $75 and positioned it
for a strong run into earnings.  Consider taking entries off the
intersecting 5 and 10 DMAs at $75.43 and $74.56, respectively.
This level should support any future consolidation.  A move
below $73 should raise your warning flags.  If robust volume
continues to drive the price higher, expect to meet formidable
resistance at $80 and $81.13, the 52-week high.  A move through
this opposition would open the door for strong upside action.
But mark your calendars, there's only seven sessions to trade
the momentum.  The company is confirmed to report on October
20th, BEFORE the market opens.

Merck recently announced that its drug, Fosamax, was approved by
the FDA for treatment to increase bone mass in men with
osteoporosis.  This medicine is the first of its kind.  It's
projected that the number of men with osteoporosis will increase
approximately 20% by the year 2015.

***October contracts expire next week***

BUY CALL OCT-70 MRK-JN OI= 7783 at $7.38 SL=5.50
BUY CALL OCT-75*MRK-JO OI=12862 at $3.00 SL=1.50
BUY CALL NOV-70 MRK-KN OI= 3239 at $8.50 SL=6.00
BUY CALL NOV-75 MRK-KO OI= 4991 at $4.75 SL=2.75
BUY CALL NOV-80 MRK-KP OI= 3136 at $2.25 SL=1.00

Picked on Oct 10th at    $76.88     P/E = 29
Change since picked       +0.00     52-week high=$81.13
Analysts Ratings    8-11-10-0-0     52-week low =$52.00
Last earnings 06/00   est= 0.69     actual= 0.73
Next earnings 10-20   est= 0.73     versus= 0.64
Average Daily Volume = 4.60 mln



*************
NEW PUT PLAYS
*************

JPM - J.P. Morgan & Co. Inc. $146.75 -5.13 (-6.25 this week)

J.P. Morgan is a leading global firm that meets critical
financial needs for business enterprises, governments, and
individuals around the world.  They advise on corporate strategy
and structure, raise capital, make markets in financial
instruments, and manage investment assets.  Their expertise is
based on an in-depth knowledge of their clients' needs and the
industries and environments in which they operate.  They also
commit their own capital to promising enterprises and invest and
trade to capture market opportunities.

After a rough spring and early summer, shares of JPM and other
leading financial stocks have been rallying off their June lows,
thanks to consolidation in the industry and the expectation of no
more rate hikes from the Fed.  But now, with hawkish comments at
the most recent FOMC meeting and Friday's report that the jobless
rate has hit a 30-year low, interest rate worries have
resurfaced.  This does not bode well for the financials.  Fears
of a weak euro are also conspiring to lead JPM lower, as the
company derives a large part of its revenues from its European
subsidiaries.  More recently, rumors surfaced that Morgan Stanley
Dean Witter had lost a substantial amount of money in junk bond
trading, which did not help the bank stocks.  Add to that concerns
about credit quality and a slumping NASDAQ cutting into earnings
for security firms and it is no wonder that financial stocks have
headed lower.  The technical picture confirms the change in
sentiment.  Ever since hitting a high at the $185 level, JPM has
settled into a trading range between $160 and $170.  Last
Thursday, the stock broke out of this range to the downside.
This was followed by further selling on Friday, putting the stock
below is 50-dma at $155.  Since then JPM has been moving ever
lower on the back of the 5-dma near $155.  Since late August, JPM
has formed what appears to be a head and shoulders pattern, with
the neckline at the $150 level.  A break below $150 support today
suggests that there is further downside ahead.  Aggressive
traders looking for an entry may want to target shoot a failed
rally above resistance at $150 and $155 a break below $145 on
volume would serve as an entry point for conservative traders.
Let us not forget that Chase (CMB) recently proposed to acquire
JPM.  Make sure to confirm direction in CMB before entering new
positions.

***October contracts expire next week***

BUY PUT OCT-150 JPM-VJ OI=1629 at $6.50 SL=4.50
BUY PUT OCT-145*JPM-VI OI= 514 at $3.88 SL=2.50
BUY PUT OCT-140 JPM-VH OI= 418 at $2.13 SL=1.00

Average Daily Volume = 1.93 mln



**********************
PLAY OF THE DAY - PUT
**********************

AETH - Aether Systems Inc $75.81 -3.88 (-6.44 this week)

Aether Systems is the company that offers information in the
palm of your hand.  They provide wireless data services and
systems enabling people to use wireless handheld devices for
real-time data communications and transactions.  The company also
designs and develops wireless data systems and software
engineered exclusively for healthcare, education and government.
AETH is based in Owings Mills, MD and has branch offices in New
York and Florida.

Most Recent Write-Up

An early slide below $80 and a failed attempt to break above $88
in Monday's session demonstrated the stock's increasing weakness.
If you missed jumping on board on the strong bounce towards
previous support at $90, then there were plenty of opportunities
to buy into the downtrend as AETH continually bumped its head on
the 5-dma ($83.55) line.  The dramatic sell-off on accelerating
volume at the end of today's session is hopefully a precursor to
succeeding losses.  There is some historical support at the
current level, if you date back to the first months of the stock
going public in the fall/winter of  1999.  However with the
52-week low at $41.13, there is plenty of room to freefall.
Besides the recent release of 24 mln shares into the market
following the lock-out period, this is purely a snowballing
momentum trend.

Comments

The NASDAQ woes continue.  It has gotten ugly in after hours with
YHOO losing ground, as well as most tech stocks.  To play this
put play, a break of $75 on good volume would warrant an entry.
Sellers could take the stock to $70.  If AETH finds some buyers,
look for a high volume rollover near $77.50 to jump in.  This would
be a nice entry if the market turns negative, along with AETH.

***October contracts expire next week***

BUY PUT OCT-85 HIZ-VQ OI= 42 at $13.63 SL=10.50
BUY PUT OCT-80*HIZ-VP OI= 22 at $10.00 SL= 7.75
BUY PUT NOV-75 HIZ-WO OI=148 at $13.50 SL=10.50

Average Daily Volume = 1.15 mln



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************************
COMBOS/SPREADS/STRADDLES
************************

Trading Strategies - The Limited-Risk Approach

The Spreads editor is away from the market this week but he has
generously provided some superb educational narratives for new
traders.

The secret to success in any form of trading is to have a well
defined strategy, a plan of attack.  The options market is
unique because it offers a variety of different ways to profit
however, the risk can often be significant.  The easiest way to
limit or control the potential for loss is to devise and follow
a specific system or set of rules.  The structure of this system
will require a number of profitable strategies along with the
knowledge to implement and manage them correctly.

The primary requirement for profitable trading is the ability to
achieve reasonable returns and control risk effectively.  For this
reason, a plan without specific targets and loss-limiting features
is certain to fail in the long-run.  A careful and deliberate
approach to strategy selection is the first step in the process.
After the principal techniques have been identified, it is crucial
to execute them with discipline and consistency.  Discipline in
option trading is the ability to maintain one’s self-control and
implement the pre-determined plan.  The most difficult skill that
traders must learn is the ability to overcome human (emotional)
impulses.  When real money is at stake, the influences of greed
and fear (of loss) will attempt to sway your judgment, hindering a
rational thought process.  If you can not overcome these effects,
the chances of success are slim.  In fact, that is the primary
reason it is so important to utilize strategies that promote a
mechanical approach to trading.  Techniques that offer little
opportunity for indecision generally provide more consistent
returns and they are exposed to far less risk than those with a
high level of maintenance.

Profitable trading strategies have a number of common traits; well
defined principles, ease of execution and flexibility.  However,
the most important characteristic for the majority of investors is
asset preservation.  In the options market, the most successful
systems are those which employ sound defensive measures.  The
ability to protect and conserve portfolio capital, while achieving
consistent returns is a fundamental quality of any profitable
technique.  Fortunately, numerous option trading strategies satisfy
this criteria and our goal at the OIN is to help novice investors
discover the most appropriate combination of trading techniques and
provide them with the tools necessary to profit on a regular basis.
With that concept in mind, we offer the following commentary as
an introduction to fundamental spread strategies.

The majority of option traders use derivatives to speculate on the
movement of stocks and indexes.  The appealing feature of option
ownership is leverage with limited risk.  If a trader correctly
predicts the market direction and takes the appropriate position,
he can expect to make a profit.  Unfortunately, that technique has
a relatively low probability of success.  As all option traders
quickly discover, owning the correct position (CALL or PUT) when
the market moves in the predicted direction will not necessarily be
profitable.  The reason is, over short periods of time (while the
trader is waiting for the option to rise in value), the position is
at risk from a variety of changes in the market.  One method that
experienced traders use to overcome this problem involves simple
combination positions or "spreads."  Spreading trading is one way
to take advantage of mis-priced options and premium disparities,
while at the same time reducing the effects of short-term changes
in market conditions so that a position can be held to maturity.

Most successful option traders engage in some form of combination,
position or spread trading.  The basic technique involves buying
and selling simultaneous (but generally opposing) positions in
different option series.  The most common strategies are used to
reduce the cost, and the risk, of a position while providing a
higher probability of a limited return.  Other, more advanced
methods of spreading are based strictly on pricing disparities.
Experienced traders know there is an identifiable relationship
between various option series and when the relationship appears to
be mis-priced, they will buy the under-priced position and sell the
over-priced position.  The spread will profit as the prices of the
instruments return to a linear relationship.

The wonderful thing about option trading is its diversity.  There
are an incredible number of strategies available, one for every
type of market trend, character and outlook.  Positions involving
combinations of calls and puts, with different strike prices and
expiration months, along with index and futures options, offer the
astute trader a variety of ways to participate in the market.  This
assortment provides even the most conservative investor the ability
to construct positions with an acceptable level of risk and reward
in almost any situation.  In addition, students of option pricing
theory can identify combinations with potentially superior returns
when the relationships between the options are theoretically skewed.
While there is no "perfect" position, successful traders learn to
maximize profits and hedge their risk in as many different ways as
possible, limiting the effects of short-term volatility and market
gyrations.  Obviously, there is no way to completely eliminate risk
but you can reduce it much more than that of a inexperienced trader
who does not utilize all of the available strategies.

Good Luck!





**********
DISCLAIMER
**********

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DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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